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Equity and efficiency considerations in area versus individual yield insurance

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  • Calum G. Turvey
  • Zahirul Islam

Abstract

Equity and efficiency considerations in area versus individual crop insurance are investigated for 609 Ontario cash crop farms. Results show that the relationship between individual and area premiums and risk reduction are explained by systematic and non‐systematic yield risk relationships. On average, area insurance premiums are much lower than individual yield insurance premiums, and in terms of efficiency in risk‐reduction individual plans are superior to area plans. As it turns out arguments of asymmetric information which has lead some researchers to investigate area vs. individual yield insurance is not totally resolved. Inequities in the benefits of area plans across farmers are not equitably distributed, favouring high‐risk producers. Adverse selection causes instability in the pooled contracts which will ultimately cause area insurance plans to fail.

Suggested Citation

  • Calum G. Turvey & Zahirul Islam, 1995. "Equity and efficiency considerations in area versus individual yield insurance," Agricultural Economics, International Association of Agricultural Economists, vol. 12(1), pages 23-35, April.
    • Handle: RePEc:bla:agecon:v:12:y:1995:i:1:p:23-35
    DOI: 10.1111/j.1574-0862.1995.tb00348.x
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    References listed on IDEAS

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    1. Harold G. Halcrow, 1949. "Actuarial Structures for Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 31(3), pages 418-443.
    2. Carriker, Gordon L. & Williams, Jeffery R. & Barnaby, Glenn Arthur, Jr. & Black, J. Roy, 1990. "Risk Reduction Under An Area Yield-Based Crop Insurance Plan for Southcentral Kansas Winter Wheat," Staff Papers 133756, Kansas State University, Department of Agricultural Economics.
    3. Mario J. Miranda, 1991. "Area-Yield Crop Insurance Reconsidered," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(2), pages 233-242.
    4. Williams, Jeffery R. & Carriker, Gordon L. & Barnaby, G. Art & Harper, Jayson K. & Black, J. Roy, 1991. "Area-Measured Crop Insurance And Disaster Aid For Wheat And Grain Sorghum," 1991 Annual Meeting, August 4-7, Manhattan, Kansas 271256, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
    6. Smith, Vincent H. & Chouinard, Hayley H. & Baquet, Alan E., 1994. "Almost Ideal Area Yield Crop Insurance Contracts," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 23(1), pages 1-9, April.
    7. Carriker, Gordon L. & Williams, Jeffery R. & Barnaby, Glenn Arthur, Jr. & Black, J. Roy, 1991. "Yield And Income Risk Reduction Under Alternative Crop Insurance And Disaster Assistance Designs," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 16(2), pages 1-13, December.
    8. Jerry R. Skees & Michael R. Reed, 1986. "Rate Making for Farm-Level Crop Insurance: Implications for Adverse Selection," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 68(3), pages 653-659.
    9. Baquet, Alan E. & Skees, Jerry R., 1994. "Group Risk Plan Insurance: An Alternative Management Tool for Farmers," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 9(1), pages 1-4.
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    Cited by:

    1. Jennifer Ifft, 2009. "Government vs Weather The True Story of Crop Insurance in India," Working Papers id:2268, eSocialSciences.
    2. Zhang, Jingong & Tan, Ken Seng & Weng, Chengguo, 2017. "Optimal hedging with basis risk under mean–variance criterion," Insurance: Mathematics and Economics, Elsevier, vol. 75(C), pages 1-15.
    3. M J Bhende, 2012. "Agricultural Insurance in India: Problems and Prospects," Working Papers id:4840, eSocialSciences.
    4. Turvey, Calum G., 2010. "Whole Farm Income Insurance in a Canadian Context," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61732, Agricultural and Applied Economics Association.

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